Hoorah for Gridlock

By

Alan Abelson

Updated May 28, 2001 11:59 p.m. ET

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Correction: Frontier Oil is the refiner described as undervalued in the following Up & Down Wall Street column. In both the paper and online editions of Barron's, the company was erroneously identified as Forest Oil, which isn't in the refining business.

What would Mr. Coolidge have said? Nothing probably. Which is what Silent Cal said about most everything.

Yet, it's conceivable, as an unreconstructed Vermonter and Republican, he might have abandoned his legendary taciturnity to observe that "The business of America is business."

Now, we must admit, at first blush, this comment, while admirably terse, does not seem especially applicable to Sen. James Jeffords' switch in affiliation from the GOP to Independent that automatically endowed the Democrats with control of the world's greatest deliberative body, gave all of Washington (including many nearby suburbs) conniptions and thoroughly spoiled Mr. Bush's day and even perhaps his holiday weekend.

In fact, however, Mr. Coolidge, the soul of economy, in both deed and word, used his signature phrase rather promiscuously in the knowledge that it had almost universal relevance. And in this particular instance, it translates quite nicely into the injunction to his fellow Republicans that there's no use in crying over spilled milk (in Vermont it's a sin to cry over spilled milk, since it means more business for the dairy farmer). The best thing to do is get on with business.

The genius and near-endless elasticity of the phrase lie in its non-specificity. Mr. Coolidge did not single out any particular type of business or even define "business" in its commonly accepted sense as commercial activity. Indeed, since he spent a sizable portion of his adult life in politics, he might just as easily have been thinking of monkey business.

But as it pertains to Sen. Jeffords' apostasy, Mr. Coolidge's implicit advice is right on the money. Instead of frittering away time, energy and breath in recrimination, as did many Republicans, both in Congress and at large, saying "Thanks a Lott" to the soon-to-be Senate minority leader or congratulating Vice President Dick Cheney on his delicate touch in dealing with a recalcitrant senator, the party ought to close ranks and get down to the business of furthering the common good, representing constituents and rewarding contributors (not necessarily in order of importance).

Mr. Jeffords' move caught President Bush napping. But once someone summoned up the courage to wake him, he lost little time in seeking to show there were no hard feelings by offering to allow the senator, a hard-core environmentalist, to participate in the EPA's new effort to determine permissible levels of arsenic in drinking water. The government, of course, would supply the glasses, the water and the arsenic.

It may come as a great surprise to you that the Democrats were gleeful, since Democrats are usually deeply concerned or handwringingly mournful or profoundly worried -- and they just never run out of things to be concerned, mournful or worried about -- but not gleeful. Cheerfulness, much less glee, is not part of the Democratic persona; it went out with Al Smith.

But the Dems simply couldn't help themselves. They were positively gleeful at the prospect of assuming control of the Senate. And what got them drooling is the realization they'll be able to do what the Republicans did when they ran the Senate during most of Mr. Clinton's tenure: make speeches and see to it that only vital legislation is passed, like disaster relief and Congressional pay raises (which may be redundant).

Mr. Bush can take obvious solace in the knowledge that the untoward turn of events does not jeopardize the gem of his agenda -- his grand tax cut. But more to the point, he can now blame the inevitable failures, fizzles and flops that attend his reign on those mischievous Democrats perched atop the Senate. Should come in right handy on the hustings in '04.

Despite the dire forebodings to the contrary proclaimed by the more rabid members of the Republican persuasion, we suspect that the nation will survive Mr. Jeffords' swap of labels. Gridlock is hardly the worst calamity that can befall our political arrangements. We recently had six years of just such gridlock, after all, and simultaneously with it, we had vast budgetary surpluses, the longest peacetime boom and the greatest bull market in the history of the world. No coincidence, we insist.

In its infinite wisdom, the stock market graced the strange happenings in Washington with the barest of glances, shrugged and then went on to fix on something less incomprehensible -- Mr. Greenspan's remarks. (Hey, everything in life is relative.) What gave those remarks, in anticipation, anyway, a certain piquancy was that they were delivered at the Economics Club of New York, the scene and occasion of his famous (or something) "irrational exuberance" comments in early 1996.

Mr. Greenspan's revelations included the astonishing disclosure that the economy has been in something of a funk, but that it seemed to poised to regain its footing (thanks, naturally, in no small measure to the exertions of the Federal Reserve), although one couldn't rule out the possibility that it would weaken further. Against this last contingency, he postulated, the Fed would likely lower rates further (although, he also stressed, care need be taken not to ignite inflation, a sentiment that, remarkably, evoked not so much as a whisper of dissent from the rapt audience).

Investors, we guess, are tough to please. Their reaction to Mr. Greenspan's comments was indecisive, mostly because they couldn't make up their minds whether to celebrate the promise of further monetary ease or the caution about the dangers of too much of a good thing (lower rates) causing a bad thing (inflation). So they chose to think about it over the three-day weekend and lightened up before leaving town.

Not a little of Mr. G's talk was devoted to an analysis of the whys and wherefores of the slowdown, accompanied by an apologia -- or explanation, to be polite -- for the Fed's actions to reverse the downtrend. The review was admirably thorough, however familiar the details. But somehow in describing the speculative excess that led to the decline of the economy, Mr. Greenspan neglected to include one minor factor -- years of easy and abundant money, courtesy of the Federal Reserve. Pure oversight, we're sure.

As it happens, a slew of economic data offered a far more eloquent commentary on the economy than did Mr. Greenspan. Housing fell off a cliff; unemployment insurance claims soared anew; durable- goods orders took a tumble; sentiment cooled again; revised GDP for the opening quarter of this month was sharply lower.

What's more -- or should we say, what's worse? -- the backlog of durable- goods orders shrank, a sorry harbinger of things to come, while inventories edged up. In like vein, mortgage applications, which are a reasonably good but not a very widely followed indicator of pending housing activity, extended their decline.

There has been an awful lot of talk lately, particularly among the usual-suspect Wall Street shills, of a second-half recovery by this rather bedraggled economy. With profits and job trends both punk, we just don't see it. What we do see is more of what we've had -- recession.

Doug Kass is a hedge-fund manager and a fellow we've known for a slug of years now. What separates him from the pack is that he's compiled an absolutely terrific record these past two and a half years, while so many in the pack have barely kept their heads above water and certainly not above high water. Specifically, on a gross basis -- before the healthy (except for their limited partners) cut of profits that hedge-fund mangers take -- Doug was up 87% in '99, 88% last year, and this year, is ahead by 21%.

He works far from the madding crowd in Palm Beach, hard by the blue Atlantic; hence, the name of his fund, Seabreeze Partners. As we've indicated before in this hallowed space, Doug loves to short stocks. Which also helps explains his exemplary performance.

A couple of months ago, Doug laid his bearskin aside and began leavening his portfolio with some longs. What he can't lay aside completely, however, is his inveterate skepticism. And last we spoke with him, he described his view of the market as agnostic. (Our favorite definition of an agnostic is someone who says, "I'm an atheist, thank God." But never mind).

In any case, Doug has by no means foresworn going short. And his favorite short right now is
AOL Time Warner.
It's a stock that, to his profit, he had been negative on, covered at $36 to $38 when he thought the market was ready for a big bounce, and recently shorted again. It closed around 53.50 on Friday.

Essentially, Doug is convinced that AOL's growth potential is limited by a maturing personal-computer industry and the company's high penetration of the market for its services. By way of support for the latter observation, he notes that this year stacks up as the second in row in which AOL is slated to snare a smaller number of net new additions to its subscription base.

Doug also is leery of management's confidence that it is not notably vulnerable to the sick economy. Not only is the Time contingent obviously feeling the impact of droopy ad outlays, but the AOL part of the company, he feels, is hardly immune, either.

He sees the recent announcement of a boost in AOL's subscription fees as a response to the softer operating environment. Whether it discourages existing subscribers, or makes it more difficult to attract new ones, remains to be seen.

For this year and next, he thinks Street estimates are too high. He expects something like $1.25 for this year and $1.45 for next. That means the stock is selling at 44 times '01 earnings and 38 times next year's. Which makes it pretty darn rich.

Also noteworthy is that management has been selling stock hand over fist. There are many reasons, to be sure, for insider sales. But a strong belief that the shares are headed higher is rarely among them.

Forest Oil
is a company that has a terribly erratic operating history, a great big wad of debt and a stock that for years on end has inhabited the lower depths. Although we're a sucker for outfits that have been down on their luck and at long last seem to have a glimmer of hope, Forest happens to be an oil refiner and normally that would be enough to turn us off. Except.

Except that our old pal and boon companion, Archie MacAllaster, likes it -- never mind likes, he owns it -- and as any follower of our Roundtable can vouch, Archie is one of the great stock pickers of our time. And, indeed, a couple of times in the past few years, he recommended Forest at those august gatherings.

But it's this year, really, that the shares have taken off. They've been as high as 13-plus, up from a 12-month low of 5 and change, and closed Friday around 11.50.

What has gotten into the stock and what makes Archie so keen on it is pure and simple -- please don't let it get around -- heating oil and gasoline prices have gone through the roof and Forest Oil is raking in the long green like mad.

Just so you get a better idea of how lush things are for Forest Oil (and of course, refiners generally), the difference between what it pays for crude oil and what it gets for the stuff it makes from crude is, Archie reckons, a cool $15 a barrel. With half that spread, he points out, the company would still be rolling in dough.

Easily the coolest investor we know, Archie is certain that oil-product prices are likely at a peak and more than likely to decline a fair piece. But he doesn't expect them to collapse.

Meanwhile, Forest's coffers are filling up; it's paying down debt and even buying back some stock. Although he cautions any estimates are chancy because of the volatility in product prices, he nonetheless thinks the company has been lately earning close to $1 a share a month and could show over $2 a share for the second quarter. For the year, $4 wouldn't knock his socks off. In the fullness of time, the stock could sell in the high teens, he says.

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